A parents intend to put a rental property in a Living Trust and appoint the adult children to be the beneficiaries.
1. How does it wok?
2. The parents wants to take the rental income from the property in the irrevocable living trust and file that rental income in their own tax return 1040. Is it possible?
What you are most likely talking about is a REVOCABLE living trust. What you mention can certainly be accomplished. Your parents would declare the income from the property on their tax return and it would pass to the children upon their deaths. This should be set up by an estate planning attorney to make sure that it is done properly.
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The Living Trust is Revocable, with one parent's portion becoming irrevocable at the death of the first spouse. Since the RLT is a 'grantor' trust under tax law, the tax consequences flow thru to the Grantors (your parents). So any rental income is 'theirs'. Upon the death of the 2nd spouse, the children become the beneficiaries. Sit down with a good Trust attorney and get this going - pronto. Good Luck.
The estate planning and trust attorneys have accurately answered your question. If your parents create a revocable living trust, the items of income, expense, deductions, and credits from that trust will flow through to them and they must report them on Form 1040. Your parents will be required to file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for their revocable living trust as long as they're both alive and mentally well and they serve as the sole Trustee or Co-Trustees of the trust.
The answer to this question does not establish an attorney-client relationship. Moreover, this attorney is licensed to practiced law ONLY in the State of California. Answers to questions from users in other jurisdictions or states are meant to provide only general information. Users should contact a local attorney in their jurisdiction or state to address their specific tax issue.
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